Structural Change, growth and jobs

Submitted by Merrell Tuck-Primdahl
On Fri, 04/15/2011

Structural transformation is a key determinant of productivity growth and explains two-thirds of the difference between superior East Asian growth and more muted Latin American growth in the past two decades.

Given the multi-speed paths that regions and countries take as they transform, with some succeeding spectacularly and some struggling to compete, it may be time to consider new industrial and labor policies to ensure that a huge swath of the lower middle class in the developing world doesn’t get left behind in the race to compete in today’s unforgiving global marketplace.

Large gaps in productivity of labor between the traditional (e.g. agriculture, rural sectors) and modern (e.g. manufacturing) parts of the economy are a fundamental aspect of most of today’s developing economies. Rodrik argues these productivity gaps and labor flows from low-productivity sectors to high productivity sectors/activities have been a key driver of growth and development since 1990.

Take, on the one hand, China, India, and some other Asian countries where high-productivity employment opportunities have expanded and structural change, reinforced by globalization, has contributed significantly to overall pace of economic growth. On the other hand, in certain Middle East and North African countries as well as in parts of Latin America and Sub-Saharan Africa, structural change hasn’t advanced or even has reversed. In some instances, labor has moved in the wrong direction, from more productive to less productive activities. In several countries in MENA and LAC since 1990, structural change has resulted in more intense import competition, causing many industries to contract and shed labor to less productive activities, such as the informal sector.

So what’s the answer in these cases? Rodrik argues that, to foster structural change of a sort that creates jobs, pragmatic, experimental policies that support new industries may be needed. Sometimes it may be that ‘mid-range industries’ actually need to be kept on life support, since they keep people employed in often relatively high wage jobs.